2nd Mortgage Holders Accused Of Illegal Arm-Twisting By Squeezing "Off-Closing Statement" Cash From Agents, Buyers When Approving Short Sale Payoffs

CNBC Real Estate Reporter Diana Olick reports:

• Just as regulators, lawmakers and all forms of financial oversight boards are talking about new regulations to guard against mortgage fraud and another mortgage meltdown, there appears to be yet a new mortgage fraud out there today, allegedly perpetuated by agents of, yes, the big banks. I was first alerted to this by Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together.

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• [H]ere's what's not legal and what's apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say "on the side," I mean in cash, off the HUD settlement statements, so the first lien holder doesn't see it. "They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale," says Brandt. "So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal." I told RESPA specialist Brian Sullivan over at HUD about all this and he replied, "That's a red flag!" Clearly illegal.

• Brandt told me he's heard from at least 200 agents that they've had these requests made by representatives of Citi Mortgage , JP Morgan Chase , Bank of America and other large banks. Most agents wouldn't go on the record with me, for fear of retribution by the banks with whom they have to work every day. But one agent, Kayte Gentry, of Keller Williams Integrity First Realty, was brave enough to blow the whistle.

For the rest of the story, see Big Banks Accused of Short Sale Fraud.